Message-ID: <23940481.1075840162356.JavaMail.evans@thyme> Date: Thu, 7 Jun 2001 12:00:45 -0700 (PDT) From: david.morris@lehman.com To: ordan.larimore@lehman.com Subject: The Morning Market Call - Thursday June 7th, 2001. Mime-Version: 1.0 Content-Type: text/plain; charset=ANSI_X3.4-1968 Content-Transfer-Encoding: 7bit X-From: "Morris, David C." @ENRON X-To: ordan.Larimore@lehman.com X-cc: X-bcc: X-Folder: \jskillin\Inbox X-Origin: SKILLING-J X-FileName: jskillin.pst <> Good Thursday Morning - Comments From The Local Guys! Over the last few weeks, the bond market has rallied (except for today), despite early indications that May was a relatively solid month for the consumer. If consumer spending remains strong, the US economy is likely to avoid a recession. With inflation under control, and the economy hopefully emerging from the slowdown over the next few quarters, it seems that financial assets, and in particular stocks, should perform well going forward. While there are some sub-sectors of the economy that are in a recession (such as manufacturing and the tech. sector), they too should start to respond to an improvement in the overall economy. Longer term, investors have a great opportunity to invest in stocks now. The 30-year US T-Bond yield is 5.70%. The 10-year note yield is 5.29%. The 5-year is trading at 4.84%. Spot crude oil is trading at $27.95 p/b. Natural Gas - Henry Hub - is trading at $3.77 p/mcf. AD Time: New Federal Insider-Trading Rule (Rule 10b5-1) have been adopted by the SEC under the Securities Exchange Act of 1934. This rule greatly enhances an insider's/employee's ability to trade his/her corporate shares during blackout periods. Previously, without the protection of this new SEC rule, employees and insiders could safely trade only outside of designated blackout windows. Under this new rule, insiders/employees may have the ability to purchase and sell their corporate shares even during blackout periods if a written plan was established and in force when the insider/employee was not in possession of material, non-public information. The new rule contains other restrictions and should be reviewed carefully. Lehman Brothers has established a turn-key plan that take into account the regulatory procedures for establishing such a plan. Please email us or call us for more information. Lehman Brothers' Research. IMPACT CALLS Wireline Services B. Bath, .202.452.4732 Scaling DSL - RBOCs Poised to Mine Returns in '02/'03 *We expect the RBOCs to benefit from multiple expansion as returns improve on the key growth initiative of DSL. The declining need for fixed investment as broadband network upgrades reach completion and rapid reductions in unit expenses as the subscriber base scales will combine to push DSL toward positive operating cashflow in '02 and positive FCF in '03. We believe there are strong parallels between the multiple expansion cable experienced over the last few years as it passed its peak investment period and the RBOCs today. *We believe THE DSL story of '02/'03 is one of decreasing required fixed investment and dramatic declines in expenses-per-subscriber, not minor fluctuations in the level of net adds each period. We expect FCF to improve from ($3.8B) in '01 to nearly $500M in '03. Cable Communications Services L. Warner, .202.452.4705 Consumer Broadband - Cable vs DSL Chapter 2 *We believe consumer broadband Internet penetration rates have reached the steepening portion of the S curve and are poised for significant acceleration. As a result, the race for the broadband customer remains of paramount importance for those providers offering the service; namely the cable MSOs and the RBOCs. We are publishing our Lehman Brothers Broadband Report Card which provides an update on this race, the relative positioning of the competitors, the strength and sustainability of demand, and key trends that we see emerging which may impact the industry. Millennium Chemicals(MCH) 3 - Market Perform S. Vasnetsov, .212.526.3212 Downgrading MCH to Market Peform Rating OLD NEW STREET P/E Price: $15.99 EPS 2000 N/A $1.65 N/A N/A 52 Wk Ra: $20 - 13 EPS 2001 $0.09E -$0.25E $0.18E N/A Mkt Cap: $1.1B EPS 2002 N/A $0.70E $1.22E 22.8 FY: 12/31 Price Target $22 $17 Rank 2 3 *We are downgrading MCH from 2-Buy to 3-Market Perform due to the sharper than expected slide in U.S. and European TiO2 demand and the deteriorating fundamental trends in the chemicals (Equistar) and the fragrance & flavor chemical businesses. *We reduced our FY2001 EPS estimates from $0.09/share to a loss of $0.25/share, due to a sharper than expected downward trend for each of MCHs businesses. Our preliminary FY2002 EPS estimate is $0.70/share. *Our revised EPS numbers for this year and next account for the pronounced pressure on MCHs earnings both in terms of the product specific fundamentals and the slower macro economic environment both in the U.S. and Europe. Commodity Chemicals S. Vasnetsov, .212.526.3212 Trough EPS - Second Leg of the "W" Year *The chemical industry is experiencing one of the worst periods in its history. While the companies are indeed scraping the bottom of the cycle, we believe that the forthcoming quarterly earnings this year are going to be even worse than current expectations. Hence, we are cutting estimates for NCX, DOW, MCH and LYO. *While our old estimates accounted for the trough industry conditions, higher energy costs and economic slowdown, our latest revisions reflect the pronounced lack of demand that we see in many of the commodity products, notably ethylene. *The trends in recent weeks provide no signs of earnings relief for the balance of this year. Commodity chemical earnings will remain weak with sluggish demand and the market's anticipation of new capacity startups over the balance of this year. Solectron Corp(SLR) 2 - Buy L. Miscioscia, .212.526.3472 3Q01 Preview: Trimming Numbers OLD NEW STREET P/E Price: $22.59 EPS 2000 N/A $0.85 N/A N/A 52 Wk Ra: $53 - 16 EPS 2001 $0.89E $0.85E $0.90E 26.6 Mkt Cap: $14.0B EPS 2002 $1.00E $1.00E $1.10E 22.6 FY: 8/31 Price Target $29 $29 Rank 2 2 *Solectron is scheduled to report 3Q01 results after the close on Monday, June 18. Our checks indicate that business conditions remain difficult with customers continuing to pushout orders, albeit at a slower pace. *Thus we are lowering 3Q01 revenues to $4.0B from $4.2B and EPS to $0.11 from $0.14. For 4Q01 we are moving to revenues of $4.2B from $4.4B and EPS goes to $0.13 from $0.16. Our FY01 estimates are now revs of $19.3B and EPS of $0.85. *On a positive note Solectron has a significant amount of cash to pursue acquisitions and we believe the company will benefit long-term from the increased amount of outsourcing. Any transaction could help offset current weakness in the end markets and when we finally get some stabilization in the economy Solectron's business should rebound. Also the shares have sold off from near-term highs, so we believe some of this bad news has been priced into the stock, however we remain cautious near-term. FOCUS STOCKS AOL Time Warner(AOL) 2 - Buy H. Becker, .212.526.1764 Strong Broadband Demand & Open Access Positive for AOL/TW (A) OLD NEW STREET P/E Price: $53.01 EPS 2000 N/A $0.94 N/A N/A 52 Wk Ra: $63 - 32 EPS 2001 $1.22E $1.22E $1.23E 43.5 Mkt Cap: $244.2B EPS 2002 $1.59E $1.59E $1.60E 33.3 FY: 12/31 Price Target $75 $75 Rank 2 2 *The cable industry, including AOL's Time Warner Cable division remains best-positioned to benefit from strong consumer demand for broadband services. *We are increasing our 2001 subscriber estimate for Road Runner by 11% to 1.95 million (+106% Y/Y). *Given limited visibility into 2H01 economic conditions and the back-end loaded nature of our forecast, we are maintaining our 2001 estimate of $40.6 billion in revenue and $11 billion in EBITDA. *Commercial roll-out of multiple ISPs (Road Runner, AOL, Earthlink, Juno & HSA) over TWC's pipes is expected for later this year. *Ultimately, we believe open access will be a net positive for TWC, resulting in both incremental subscribers and revenues. *We think a potential rate strategy would be to brand Road Runner as a "value" offering at $40 and AOL as a "premium" service at $50 plus per month. Wells Fargo(WFC) 1 - Strong Buy H. Dickson, .212.526.5659 Earnings Revision (A) OLD NEW STREET P/E Price: $48.77 EPS 2000 N/A $2.53 N/A N/A 52 Wk Ra: $56 - 38 EPS 2001 $2.88E $2.10E $2.82E 23.2 Mkt Cap: $84.8B EPS 2002 $3.25E $3.20E $3.21E 15.2 FY: 12/31 Price Target $65 $65 Rank 1 1 *WFC announced today that they will be taking a $1.13 billion (after-tax) charge primarily due to impairment write-downs on securities in the venture capital portfolio. We believe that this charge is not reflective of a charge to the core businesses and we believe that it better positions WFC to sustain strong operating performance. We continue to rate WFC 1 - Strong Buy. *We are reducing our 2001 estimate $0.78 to $2.10 and reducing our 2002 estimate $0.05 to $3.20. These reductions reflect the charge and lower volatile revenue levels. *Approx. $1.05 B (after-tax) is related to impairment write-downs due to recent sustained declines in market value on publicly traded and private equity securities. In 2Q00 and 4Q99, WFC recorded approx. $1B in unrealized gains on these securities. *Approx. $70 mm (after-tax) is related to putting the First Security auto lease portfolio up to the WFC standard. The portfolio is now insured. Dover Corp(DOV) 3 - Market Perform D. Zwyer, .212.526.2008 Reiterate Cautious 3 Market Perform Rating OLD NEW STREET P/E Price: $42.17 EPS 2000 N/A $2.57 N/A N/A 52 Wk Ra: $52 - 33 EPS 2001 $1.75E $1.75E $1.87E 24.1 Mkt Cap: $8.6B EPS 2002 $2.10E $2.10E $2.40E 20.1 FY: 12/31 Price Target $38 $38 Rank 3 3 *We reiterate our cautious 3 Market Perform rating on Dover's stock, which trades at 20 times est. 2002 EPS of $2.10 per share. We expect Dover's circuit board assembly and test (CBAT) and specialty electronics components (SEC) businesses will continue to face difficult market conditions through the rest of 2001, and the expected rebound in 2002 will be off of a lower base than many investors expect. We also anticipate weaker than expected results for Dover's diversified manufacturing businesses. We note that our earnings estimates are below Street consensus, suggesting disappointment is possible. *Industry trends suggest that Dover's technology customer demand is continuing to suffer from bloated inventories and a slowdown in telecom spending. Recent reports suggest that Dover's contract equipment manufacturer and telecom/datacom customers continue to see weak demand. Linens 'n Things(LIN) 1 - Strong Buy A. Rifkin, .212.526.1922 Continued Challenging Environment - Lowering Estimates OLD NEW STREET P/E Price: $28.32 EPS 2000 N/A $1.60 N/A N/A 52 Wk Ra: $38 - 20 EPS 2001 $1.78E $1.73E $1.78E 16.4 Mkt Cap: $1.2B EPS 2002 $2.15E $2.05E $2.13E 13.8 FY: 12/31 Price Target $35 $35 Rank 1 1 *We are lowering our EPS estimates for 2Q, 2001 and 2002. We point out that while sales are soft, we believe comps at Linens 'n Things are consistent with overall retail trends for the quarter. *In addition to the broad-based weakness in the macro environment, we believe that recent liquidation sales at HomePlace have had a greater negative impact on comps than previously expected, hurting LIN 2Q comp by an estimated 1.5%. We believe business has stabilized in the last week, with easier comparisons in June vs the month of May. Quarter-to-date, we believe LIN comps are trending in the (2)%-(3)% range. *Lowering Estimates. We are lowering our 2Q est to $0.15 from $0.17, our 3Q est to $0.48 from $0.50, and our full year 2001 est to $1.73 from $1.78. We are also lowering our 2002 est to $2.05 from $2.15. *Valuation. LIN shares trade at 16.4x our 2001 est of $1.73 and at a 60% discount to BBBY---near the lowest relative valuation to date. COMPANY/INDUSTRY UPDATES Internet Infrastructure Services H. Blount, .212.526.9128 Refuting the Overcapacity Myth *Lehman and Cushman & Wakefield have completed a proprietary study on telco real estate (TRE) including carrier hotels and data centers. Our conclusions: *We believe other recent studies overstate truly available capacity. While we have identified about 77 million sq. ft. of total capacity, we believe only 43 million is actively available for lease. Much of the difference is unlikely to be used as TRE and has been incorrectly emphasized in other market studies. *We reject the conclusion that all TRE is a commodity. Lease prices to operators for existing TRE are holding steady in most markets. *Barriers to entry are rising due to power, capital and location constraints. *Operators' customer demand remains weak, but operators like EXDS with quality properties should benefit long-term. Oil & Gas T. Driscoll, .212.526.3557 Exploration & Production: Injection of 117 bcf for week end 6/1 *This week's storage injection of 117 bcf was far in excess of our 90 bcf expectation. This injection number, adjusted for weather implies supply growth or a demand decrease of 2 bcfpd. We think demand needs to rise 2-3 bcfpd from recent levels to balance. There is an increasing likelihood that gas prices will fall through the floor implied by residual fuel oil. As a result, gas could reach the low $3/MMbtu range. David C. Morris Sr. VP Lehman Brothers 713-652-7112/800-227-4537 dcmorris@lehman.com Disclosure Legend: A-Lehman Brothers Inc. managed or co-managed within the past three years a public offering of securities for this company. B-An employee of Lehman Brothers Inc. is a director of this company. C-Lehman Brothers Inc. makes a market in the securities of this company. G-The Lehman Brothers analyst who covers this company also has position in its securities. Key to Investment Rankings: This is a guide to expected total return (price performance plus dividend) relative to the total return of the stock's local market over the next 12 months. 1 = Strong Buy (expected to outperform the market by 15 or more percentage points); 2=Buy (expected to outperform the market by 5-15 percentage points); 3=Market Perform (expected to perform in line with the market, plus or minus 5 percentage points); 4=Market Underperform (expected to underperform the market by 5-15 percentage points); 5=Sell (expected to underperform the market by 15 or more percentage points). This document is for information purposes only. We do not represent that this information is complete or accurate. All opinions are subject to change. The securities mentioned may not be eligible for sale in some states or countries. This document has been prepared by Lehman Brothers Inc., Member SIPC, on behalf of Lehman Brothers International (Europe), which is regulated by the SFA. ?Lehman Brothers, Inc. ------------------------------------------------------------------------------ This message is intended only for the personal and confidential use of the designated recipient(s) named above. If you are not the intended recipient of this message you are hereby notified that any review, dissemination, distribution or copying of this message is strictly prohibited. This communication is for information purposes only and should not be regarded as an offer to sell or as a solicitation of an offer to buy any financial product, an official confirmation of any transaction, or as an official statement of Lehman Brothers. Email transmission cannot be guaranteed to be secure or error-free. Therefore, we do not represent that this information is complete or accurate and it should not be relied upon as such. All information is subject to change without notice. - MF June 7th 2001.pdf